This article first appeared in The Edge Malaysia Weekly on October 15, 2018 - October 21, 2018

A look at the latest data from the National Property Information Centre (Napic) reveals that a significant number of hotels have been built since 2008. An average of 87 hotels a year have been constructed nationwide over the past decade, for a total of 873, according to Napic. In the first quarter this year, there were 3,136 hotels in the country, compared with 2,263 in 2008. In terms of rooms, the number jumped 59.1% to 248,795 as at 1Q2018, from 156,347 in 2008.

An estimated 4,400 new rooms by notable hoteliers are set to hit the market over the next four years, according to a May report by Edgeprop.my. This has sparked concern over a potential oversupply of hotel rooms, which could affect occupancy rates and, ultimately, profit.

Alternative accommodation, such as Airbnb, is also disrupting the hospitality sector, given their growing popularity with travellers. And the decline in tourist arrivals is not helping.

Tourism Malaysia data shows that the number of arrivals fell from 26.75 million in 2016 to 25.95 million last year while receipts remained flat at RM82.1 billion.

In 1Q2018, arrivals totalled 6.52 million, and receipts came up to RM18.34 billion. Based on current numbers, achieving this year’s target of 33.1 million arrivals and receipts of RM134 billion would be more than a stretch.

To make matters worse, the International Monetary Fund recently slashed the global economic growth forecast for 2018 and 2019 to 3.7%, from 3.9% previously, owing to the escalating US-China trade war as well as tighter liquidity and capital outflows in emerging markets.

Fortunately, hospitality stocks and real estate investment trusts (REITs) — such as Shangri-La Hotels (M) Bhd, Genting Malaysia Bhd, and YTL Hospitality REIT — are expected to weather oversupply issues in the sector and, to a certain extent, a weaker global economy.

This, analysts say, is because they cater for segments of the market that are pretty much insulated from such factors.

Genting Malaysia, which operates Resorts World Genting — comprising a casino, theme park and hotels in the highlands of Pahang — has the unique advantage of cooler temperatures and a casino to draw repeat customers.

“With the gaming industry, tougher economic conditions could have the opposite effect on business compared with other types of businesses. People are more likely to try their hand at gaming during difficult times, which in the past seems to be the case with the number forecast operators as well,” says Public Invest Research analyst Eltricia Foong, who covers Genting Malaysia.

However, she says one catalyst everyone is waiting for is the 20th Century Fox Theme Park. The opening of the attraction has been delayed a number of times and it is now slated to open in 1Q2019.

About 62% of Genting Malaysia’s revenue is derived from its leisure and hospitality segment in Malaysia while the remaining 38% comes from its casino operations in the UK, Egypt, the US and the Bahamas, as well as its property segment.

“Right now, there is nothing very exciting for Genting Malaysia. The theme park will be the one that can potentially bring the crowds in and subsequently draw more people into the casino. But you will not see the numbers coming in as soon as the theme park opens because the company will need to account for the depreciation charges,” Foong says.

Genting Malaysia’s share price took a beating last week, falling 10.7% from RM4. 94 at the close of Oct 5 to RM4.41 on Oct 11.

Investors are jittery over the possibility of additional sin taxes as Prime Minister Tun Dr Mahathir Mohamad had remarked at a recent investor conference that Malaysians need to brace for new taxes as the country is heavily in debt.

At its current price — a price-earnings ratio (PER) of 17.59 times — analysts believe Genting Malaysia is attractive given the street’s consensus target price of RM5.93. There are 17 “buy” and four “hold” calls.

For the second quarter ended June 30 (2QFY2018), Genting Malaysia’s revenue grew 5.7% to RM2.42 billion while net profit doubled to RM395.71 million, partly because a project bid cost of RM16.9 million was written off in 2Q2017.

As for YTL Hospitality REIT — with a  portfolio that includes market brands Marriott, Ritz-Carlton, The Majestic and Pangkor Laut Resort, to name a few — it is likely to see stable revenue.

Analysts say this is because the REIT derives rental income from the hotels — renewed every five years — as it is not the operator of the Malaysian hotels in the portfolio. In Australia, the REIT operates three Marriott hotels in Sydney, Brisbane and Melbourne.

“It is doing well in Australia as well. Even with the weaker economic conditions, I think it is pretty much insulated because it caters for the higher-end market segment. The REIT has a stable growth outlook and there is room for growth for its Australian properties,” says AmInvestment Bank Research analyst Thong Pak Leng.

He has a “buy” call on the REIT with a target price of RM1.35.

Currently, the REIT offers an attractive 6.7% yield. Over a period of one year, the price of its unit appreciated 4.29%, closing at RM1.18 last Thursday.

The Kuok Group majority-owned Shangri-La Hotels has hospitality brands such as Hotel Jen, Traders Hotel Kuala Lumpur and Golden Sands Resort Penang in its portfolio, apart from the luxury Shangri-La brand.

Shangri-La’s net profit for the cumulative six months ended June 30 gained 24% to RM40.52 million year on year, while revenue grew 6% to RM267.22 million.

The better performance came on the back of higher occupancy rates. For Shangri-La Kuala Lumpur, it rose 1% to 66% in the first half.  The mid-range Hotel Jen in Penang saw an occupancy surge and hit 77% for the period versus 55% a year ago.

Shangri-La group expects the operating environment for the group’s hotels and resorts to stay broadly positive for the second half, supported by the leisure and business travel segments.

Over a one-year period, its share price gained some 6% to close at RM5.70 last  Thursday. Its PER stands at 30.79 times.

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